Daily Rate Update: July 29th-August 2nd

And the survey says: 164K jobs created in July, just above the 160,000 expected, reports the Bureau of labor Statistics. The report showed that revisions for May and June were revised lower by 41,000, the Labor Force Participation Rate ticked up to 63%, and the U6 number, or total unemployed, fell to 7% while average hourly earnings rose 0.3% versus 0.2% expected. The unemployment rate inched higher to 3.7% from 3.6% as more Americans entered the workforce. Overall a solid report.

Yesterday, the White House took the US markets by surprise when it announced it may slap a 10% tariff on an additional $300 billion in Chinese exports entering the US. The headlines pushed bond prices higher, yields lower while US stocks fell. The president did say that he would hold off on the tariffs if certain measures are met and meet in September as scheduled. Stocks are modestly lower after the volatility that took place this week. The markets will now be eagerly awaiting any new trade headlines, which could turn positive rather quickly.

The Federal Reserve cut the benchmark short-term Fed Funds Rate (FFR) yesterday by 0.25% for the first decrease in that rate since December 2008. The move did not come as a surprise though the Fed signaled that there may just be one more rate cut in 2019, down from three cuts that were expected before yesterday’s Fed meeting. The decrease in the short-term rate will impact personal and car loans, credit cards and the like. The FFR is the interest rate at which depository institutions (banks and credit unions) lend reserve balances to other depository institutions overnight, on an uncollateralized basis.

US construction spending fell for the second month in a row in June and was the biggest decline in seven months fueled by a big drop in private construction spending. The Commerce Department said construction spending declined 1.3% from May. In a separate report, the ISM National Manufacturing Index fell to 51.2 in July, the lowest reading since August 2016. The declines were due in part to the lingering effects of the trade issues between the US and China.

Mortgage rates were unchanged this week and remain near multi-year lows and seem to be bottoming out after the steep decline in 2019. Freddie Mac reports that the 30-year fixed-rate mortgage was unchanged this week at 3.75% with an average 0.6 in points and fees. Freddie Mac says going forward, the combination of low mortgage rates, tight labor market and high consumer confidence should set up the housing market for continued improvement in home sales heading into the late summer and early fall.

Freddie Mac released its Economic & Housing Research Forecast for July showing that the housing market will see increased momentum due to low mortgage rates. Freddie Mac is forecasting that the 30-year fixed-rate mortgage will average 4.1% in 2019 and 4% in 2020. In addition, consistently strong homebuilder confidence and lower mortgage rates support our view that housing starts and sales will recover from their slump in 2018. Home prices are expected to rise 3.4% in 2019 and 2.6% in 2020.

Freddie Mac went to forecast that total mortgage originations to be $1.8 trillion in 2019 and $1.7 trillion in 2020. The refinance share of originations is expected to increase to 34% in 2019, before decreasing slightly to 28% in 2020, as the effect of lower rates on refinance originations tapers over time. As far as economic growth, Gross Domestic Product is expected to average 2.1% in 2019 before decelerating to 1.8% in 2020.

Private payroll growth rebounded in July after a weak reading in June. ADP private payrolls rose 156,000 in July, above the 150,000 expected while June was revised higher to 112,000 from 102,000. “Job growth is healthy, but steadily slowing,” Mark Zandi, chief economist at Moody’s Analytics, said in a statement. “Hampering job growth are labor shortages, layoffs at bricks-and-mortar retailers, and fallout from weaker global trade.”

Inflation continued to remain tame in June, as evidenced by a key inflation indicator. The Core Personal Consumption Expenditure (PCE), which strips out volatile food and energy, rose 1.6% in June, below the 1.7% expected. The Core PCE is the Fed’s favorite inflation gauge and it has set a target range of around 2%. The Fed has said that inflation will continue to run low for several years to come. Inflation can be defined as the overall general upward price movement of goods and services in an economy.

Home price gains continued to cool off in May and have come back down to more sustainable levels. The S&P 20-City Home Price Index rose 2.4% annually in May, down from 2.5% in April and well below the 7% gains seen a year ago. On a national level, the Home Price Index rose 3.4%. On a monthly basis, the 20-City Index rose 0.1%. Philip Murphy, Managing Director and Global Head of Index Governance at S&P Dow Jones Indices said, “Among 20 major US city home price indices, the average year-over-year gain has been declining for the past year or so and now stands at the moderate nominal year-over-year rate of 3.1%.”

The Conference Board reports that the Consumer Confidence Index in July surged to 135 versus the 125 expected and up from 124 in June. It was the third highest reading since October 2000. Within the report it said that those saying jobs are “plentiful” increased from 44% to 46.2%, while those claiming jobs are “hard to get” declined from 15.8% to 12.8%. “After a sharp decline in June, driven by an escalation in trade and tariff tensions, Consumer Confidence rebounded in July to its highest level this year. These high levels of confidence should continue to support robust spending in the near-term despite slower growth in Gross Domestic Product.”

The US capital markets are on hold today in what is shaping up to possibly be a volatile week. The inflation reading and the Fed’s favorite inflation gauge, the Core PCE, will be released on Tuesday while the closely watched Jobs Report for July is released on Friday. The two-day Federal Open Market Committee meeting will kick off on Tuesday and ends Wednesday at 2:00 p.m. ET with the release of the monetary policy decision. It is expected that the short-term Fed Funds Rate will be cut by 25 basis points.

Due in part to a strong job market, credit scores rose to a three-year high recently, reports Ellie Mae. The average credit score of borrowers for all types on mortgages rose to 731 in June. Breaking down the numbers showed that, for conventional mortgages backed by Fannie Mae and Freddie Mac, the average FICO score for refinances was 742 and 754 for loans to purchase homes. The current unemployment rate is 3.7%, the lowest in almost 50 years.